Carbon price an outdated way to cut emissions

Matthew Warren

The Vales Point power station on Lake Macquarie, near Newcastle. Photo: Michele Mossop

If Labor is really committed to delivering on climate change, then they should be prepared to consider negotiating with the Coalition on repeal of the carbon tax.a

Sounds crazy? Not really. Most of the factors that will drive emissions reductions for the rest of the decade are not dependent on a price on carbon. For Labor, staying in the game to get broader energy market reforms is the best way to deliver meaningful action to reduce greenhouse emissions.

This is advice from a long-standing industry supporter of a well-designed emissions trading scheme in Australia. The Energy Supply Association of Australia was represented on John Howard's task group on emissions trading in 2007 and was a key participant in the design of the Carbon Pollution Reduction Scheme in 2009 and the current Clean Energy Future legislation.

But these carefully consultative processes have repeatedly been overtaken by events.

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First there was the global financial crisis. Europe's flagship carbon trading scheme began to wobble, then free-fall with the extra stress of the sovereign debt crisis. Concerted US action on emissions was deferred indefinitely. Economic crisis slowed greenhouse gas emissions and distracted global commitment. As Kevin Rudd found out at the climate change negotiations in Copenhagen 2009, the deal was off.

As the world dusted itself off after the financial crisis, we discovered a couple of big surprises. First, demand for energy in most developed economies has continued to fall since the shock of 2008, even as the economic recovery has taken place. Industrial activity is siphoning to the developing world and improvements in efficiency are beginning to make a real difference.

Australia's electricity demand has now been falling for five years, dragging our greenhouse gas emissions down with it. Australia's emissions have fallen by 4 per cent since 2008, but this has had little to do with a price on carbon. The high Australian dollar, the dial-down of activity at energy-intensive sites like aluminium smelters, car plants and refineries, the higher cost of electricity, energy efficiency and the take-up of solar energy have all played a part.

In 2007, when Kevin Rudd was elected, less than 3,000 Australian households had solar panels on their roofs. Today there are more than a million. Solar has continued to steadily deploy even after the removal of most subsidies. With or without a price on carbon, it is clearly going to play a significant role in the energy supply of the 21st century.

Labor's biggest policy success in reducing emissions wasn't a price on carbon. It was increasing the renewable energy target to 20 per cent of generation by 2020. This policy, backed by the Coalition, has already forced in 1800MW of large-scale renewable generation into the Australian electricity market and almost twice as much rooftop solar.

But there's a problem. The target was passed in 2009, when it was assumed demand for energy would continue to grow as it had since the end of World War II. Renewables were intended to fill that growth.

With demand falling, the target is now approaching 30 per cent. This means we will have to build even more renewable power stations trying to sell electricity into an already over-supplied electricity market. The higher cost of gas means in many instances more efficient, more modern and lower-emission gas generators are being stranded and older, cheaper coal generators remain online.

The kicker is that with no carbon price, the oversupply means that the wholesale price is likely to drop so low that even the value of renewable energy certificates won't be enough to pay for more new renewables.

You could try and fix this with a carbon price, but now with higher gas prices it would need to be $70 or more for each tonne of carbon. Australia's current fixed carbon price is $24.15 a tonne. If we link to the European scheme in 2015, it will fall to less than $10.

Climate change policy should be about outcomes, not process. There are a number of ways to deliver a sustained and affordable reduction in greenhouse gas emissions. Putting a price on carbon was seen as the primary policy tool back in 2007 when Labor was elected with what it would claim was a "mandate" to tackle climate change.

A Labor opposition committed to real outcomes on climate change might want to consider all of these challenges, and take a longer view. The challenge now is how to get the best deal to deliver sustained emissions reductions at the most affordable cost. To deliver this we need an orderly replacement of Australia's high-emitting generators with a lower-emission fleet, a challenge for the rest of the decade and beyond. Politics is, after all, the art of the possible.

Matthew Warren is chief executive of the Energy Supply Association of Australia.